The only thing that is permanent in life is CHANGE. The rate of change in the last two decades has been more than the change that took
place in the previous fifty years. If you wish to succeed
the RATE of LEARNING must always be
greater than the rate of CHANGE.
Do not resist change,
IMROVE your learning and ADAPT to CHANGE.

Clearing and Settlement

11.1. The Mechanism
Clearing system is a mechanism for calculating and determining each bank’s ‘payments / receipts’ position within the Commercial banks forming part of the system. A clearing system is governed by its rules which, among other things, include ‘timing’ for presentation and return of payment instruments.

Settlement is the transfer of value to discharge a payment obligation. Settlement may be within the branch or within the bank or among other banks. The first two being fairly easy, it is the last part of settlement that involves more banks and settlement is effected through the State Bank of Pakistan. Logistical help since the last few years is obtained from National Institutional Facilitation Technologies (NIFT).

11.2. Payment instruments:
a. First we study the settlement procedure for cheques deposited for credit to an account in the branch drawn on the collecting bank branch itself, where the person who is receiving the payment and the person who is making the payment, both maintain their accounts at the same bank branch – These are also called TRANSFER items since they involve transfer of funds from one account in a branch to another account in the same branch. These cheques are sorted account-wise, particulars such as date; amount and balance in the account checked and signatures verified and then passed on to the counter for posting in the relevant account. If the cheque is passed, credit is afforded to the payee but if the funds in the account are not enough or there is some other reason the cheque will be returned as per practice.

b. Collection of cheques drawn on other branches of the same bank in the town — as soon as the cheques are received these are crossed with the bank’s crossing stamp, sorted out branch wise and then sent to the concerned branch/branches. In the modern times most banks branches are connected ‘on line’ with each other through telephone or satellite links. The account and specimen signatures can be accessed on the system. The cheques drawn on other branches are posted ON LINE and credit afforded to the customer depositing the cheque.

c. Cheques drawn on other banks in the same city/town— the cheques are crossed with bank’s crossing stamp and are sorted and dealt with through the usual clearing procedures which we shall study in detail.

11.3. Items dealt with outside the clearing system:

i. Standing Orders.

ii. Cheques / drafts payable in US Dollars.
(USD instruments drawn on banks in Pakistan are cleared through NIFT system in Karachi which will be explained)

iii. Cheques with attachments

iv. Bills of Exchange other than cheques.

The procedure/process of the Classical Clearing House
Traditionally in all cities it was; and even now in remote towns the “clearing” of cheques still is; undertaken manually in the local State Bank of Pakistan or National Bank of Pakistan.(In those cities where State Bank of Pakistan does not exist, the National Bank of Pakistan performs some functions of State Bank of Pakistan including the Clearing House functions)

Cashiers from all banks who are members of the clearing house gather together in the ‘clearing house’ situated in SBP or NBP and “exchange” the cheques drawn on each other which are listed on clearing schedules.
The clearing is balanced with the help of the State Bank representatives.

For the sake of illustration we assume that there are only three commercial banks in a town. Bank A, Bank B, and Bank C.
On working day 1, customers of all banks deposit cheques in their own banks, drawn on other banks, for credit to their accounts. The bank A customers will deposit cheques drawn on bank B and Bank C, for credit to their account in their own bank A. When the banking hours come to an end the cashier of Bank A will make Clearing Schedules.
He will prepare one add-list of all cheques drawn on Bank B and one add-list of all cheques drawn on Bank C and will add up the totals of the two lists. This grand total is the amount Bank A has to receive from Bank B and Bank C. It is called Outward Clearing total.
On the morning of Day 2 the cashier of Bank A will carry the cheques and lists to the clearing house where he will deliver the clearing schedules with cheques to the two other banks consisting of cheques drawn on them. The total of the two schedules is the ‘Clearing Delivered amount’. All the three banks will similarly exchange the schedules including cheques. Bank A will receive schedules with cheques drawn on itself from Bank B and Bank C. The cashier will total the two schedules which is the ‘Total Clearing Received’ or Inward Clearing. The State Bank Officer will also be in the room. All the cashiers will give their Delivered and Received figures to the State Bank who will make a chart of the delivered and received amounts of each bank. The totals of received and delivered amounts should obviously be equal. The SBP clearing officer will give the figures of each banks delivered and received cheques to the Deposit Accounts Department (DAD).This is the department in SBP where the current accounts of commercial banks are maintained. State Bank will debit each bank with the clearing received by the bank and credit each bank by the amount of clearing delivered by it.

All the cashiers will return to their banks.
Bank A cashier will bring the schedules and cheques drawn on it by Bank B and C. The clearing cheques received will be posted/debited to the respective customer accounts. The total of Clearing Received (inward clearing) will be credited to State Bank account in the accounting books of the bank.
For the clearing delivered/outward clearing the customer’s accounts of those who deposited cheques will be ‘provisionally’ credited and the total of clearing delivered will be debited to State Bank of Pakistan account. Word of caution: the customers will not be allowed to draw amounts against these credits till the next working day because the cheques deposited by them have not yet been ‘cleared’ and are as yet subject to return.

Clearing amounts are settled amongst the banks through the accounts maintained at SBP.
As you know that all banks maintain their accounts at State Bank of Pakistan where the amount of the Statutory Cash Reserve (these days 5% of Customer Deposits) is held.
State Bank officer who presides the clearing house function and has all the figures of clearing will pass the following entries in SBP books:-
Debit: Bank A Total of Inward Clearing Cheques received by Bank A
Credit: Bank A Total of Outward Clearing Cheques delivered by Bank A
Similar entries are passed over the accounts of Bank B and C.

The inward clearing cheques will be posted on the customer accounts. The cheques that are not passed due to shortage of funds in the accounts or other technical reasons like signatures, crossings, endorsements, variance in words and figures, post dated or stale cheques,etc., are returned (to those banks, which had delivered the cheques during the morning session) in the afternoon session of the clearing house which is called ‘Return Clearing Session’. The process for returned cheques is exactly opposite of the main clearing session. The entries passed are opposite. The cashiers bring back to their offices the returned cheques. The accounts of those customers who had been provisionally credited but the cheques deposited are returned, are debited with the amounts of the returned cheques and the cheques are sent back to the customers who deposited the cheques under cover of suitable cheque return memos.
On Day 3 the customers(who deposited cheques) are allowed to draw funds from clearing items credited on Day 2 but not returned.

The above describes how each bank makes payment for the cheques drawn on it and presented by other banks to it in clearing. Also how each bank receives payment for the cheques drawn on other banks. The Return Clearing session is held to clear the cheques that could not be passed.
This is the manual method through the bank cashiers visiting “clearing house”. This method has been used since early times of banking and is still used in smaller towns.

New System of Clearing.
The number of cheques and other instruments received by bankers every day for clearing is currently so huge in large cities and the number of banks and their branches has swelled so much that manual sorting and manual exchange at the SBP clearing house is difficult if not impossible. Hence a clearing system has been devised which enables the banks to outsource the sorting and exchange of the payment instruments and settlement to a third party institution which has latest technology to undertake the task.
Basically the concept is the same. The banks accounts in State Bank are credited and debited with the amounts of cheques delivered or received. Only logistics are different.

11.4. Clearing System — National Institutional Facilitation Technologies (NIFT)

Until a few years ago the cheques sent in clearing used to be collected at the main branches of each bank, sorted out bank-wise and then sent to the clearing house in SBP for exchange of cheques and ultimate debit/credit to the accounts of the concerned banks as described in detail above. The balancing was manual and delays were a common feature.

In 1996 a private company was incorporated by the name of National Institutional Facilitation Technologies (Pvt) Limited (NIFT) to handle this most important segment of banks business. The automated clearing system came into operation in Karachi as the first centre in 1996. Now it has spread to Lahore, Islamabad, Rawalpindi, Faisalabad, Hyderabad, Peshawar, Multan and Quetta and almost all important cities.
The introduction of the automated clearing involved creating local standards for encoding cheques and other instruments, assisting banks in preparing standard code line. The system operation has proven to be a very successful arrangement. The machines sort the cheques for the preparation of schedules with the help of electronic code line which is printed at the bottom of each cheque in machine readable magnetic ink.

NIFT have their own office in each city with modern computers, sorting machines and trained staff. Each bank branch only make a listing of the cheques to be delivered to the other banks through NIFT.
NIFT staff visit the bank branches on Day 1 and collect the cheques from the branches and bring the cheques and listing prepared by the branch to the NIFT office. This is done for all the bank branches in a city. During the night they sort the cheques and make (inward clearing) listings for each bank branch on which the cheques are drawn. The grand total of the listings prepared by the NIFT will agree with the grand total of the listings prepared by the bank branches in respect of the cheques delivered by them. This balancing means that the NIFT prepared listings are correct so far as the amounts are concerned.
Next morning on Day 2 the NIFT staff delivers the cheques to the bank branches on which the cheques are drawn. During the morning time the bank staff examines the cheques and post the cheques to the accounts on which they are drawn. By afternoon the return cheques are decided and return memos prepared. In the afternoon the NIFT staff collects the return cheques and take them to the NIFT office where the record is prepared and return cheques sent to the branches which had delivered the cheques. The branches then debit the accounts which had in the morning been credited with the amounts.

NIFT office advises the State Bank as to the entries to be passed by them on the accounts of the banks in State Bank in respect of clearing. NIFT also advises the banks of the clearing amounts. Please remember that when a bank has more than one branches in one city only the main office in the city maintains account in the State Bank. The number of branches in a city settle clearing amounts with their main office and main office for the net amount settles with state bank.
Note that under NIFT system the bank cashiers do not carry cheques to State Bank or to NIFT office.

11.5. Clearing services offered:

I. Overnight clearing including return cheque processing (24 hour clearing cycle)

ii. Same Day / High Value clearing including return cheque processing (3 hour clearing cycle)

iii. Inter City clearing including return cheque processing (48 hour clearing cycle)

iv. Countrywide Local US Dollar clearing (One week clearing cycle)


11.6. Basic Services and Facilities offered by NIFT:

• Inter-bank clearing and settlement (Inter-bank means between one bank and other banks, i. e. between XYZ Bank and other banks.)
• Intra-bank clearing and settlement (Intra- bank means between different branches of the same bank.)
• Collection and Delivery
• Advices / vouchers for intra-bank and inter-bank accounting
• Direct posting support on media for returns
• Query systems — software and data enabling large member banks;
• Call centres
• Reports and statistics to member banks on a regular basis
• NET for central bank settlement; (NIFT sends information to State Bank of Pakistan to pass debit credit entries over the accounts of banks for settlement of the clearing)

11.7. Clearing may be divided into:

• Outward clearing
• Inward clearing
• Same day clearing (for large amounts)

11.8. Outward clearing:

Outward clearing contains cheques / instruments drawn on banks within the city. These instruments may be:

o Cheques
o Pay Orders
o Pay Slips
o Demand Drafts
o Dividend Warrants
o Telegraphic Transfer Receipts
o Rupee Traveller Cheques

All cheques sent in clearing must have a “clearing stamp” i.e. a combination of two different stamps — one Special Crossing Stamp which bears the name of the bank and the branch name and the other with the words “Clearing” along with bank’s branch name and date.

11.9. US Dollars Instruments Collection and Settlement System
Previously USD cheques deposited in accounts were to be routed through New York, thereby costing time and expense. The State Bank has introduced Local System. Its salient features are as under:

11.9.1. Instruments
All financial instruments (cheques, drafts etc.) denominated in US$ drawn on bank branches in cities Karachi, Lahore, Islamabad, Rawalpindi, Faisalabad, Multan, Sialkot, Peshawar, Quetta, Mirpur (Azad Kashmir) and Hyderabad and several other cities are acceptable for this settlement system. Collection from all other cities is arranged / managed by each bank, by making internal arrangements, through any one of the above cities.

11.9.2. Collection & Settlement Schedule
Initially there were two collection and settlement days per week, i.e. Monday and Thursday. If a collection / settlement day happens to be a bank holiday, then it will be skipped till the next collection/ settlement day.

Each bank designates a branch/Regional/ Head office in Karachi for presenting outward and receiving inward instruments for collection and settlement through National Institutional Facilitation Technologies (Pvt.) Ltd. (NIFT).
NIFT deals with only one designated office of each bank in Karachi for settlement of Karachi and upcountry branches.

Each bank may also designate one branch in each city (i.e. from the coverage list) with whom NIFT and the designated branch of that bank in Karachi, if required, would liaise for issues regarding collection & settlement relating to other branches in that city.

11.9.3. Mandatory Settlement
It is mandatory for the banks operating in Pakistan, whose Head Offices or branch offices are located in Karachi, to be a member of this system., to open US$ settlement account with a minimum balance of US$ 10,000/- for settlement with SBP BSC (Bank) Karachi (i.e. State Bank of Pakistan Banking Services Corporation Bank, Karachi.) and thereafter to maintain sufficient balance to cater to the requirements keeping in view their business volume. The said account will be remunerated on the same interest rate as for Statutory Cash Reserve Requirement (SCRR) for FE-25 and to settle payment of US$ instruments drawn on them through this system or to return unpaid instruments on settlement date. In case the paying bank does not return the original instrument on the settlement date to the presenting bank, it will be assumed that the instrument has been accepted for payment and will be settled through this system accordingly.

11.9.4. Processing Cycle
The collection/settlement is centralized at Karachi. NIFT interfaces with one designated branch of each bank in Karachi only.

Banks route all inward/outward instruments from their branches in Pakistan through their designated branch in Karachi.

NIFT collects / delivers all instruments for inward/outward settlement from the designated branches of Banks in Karachi, process the collection/settlement and deliver a consolidated statement to the respective designated branch of the bank.

Each designated branch in Karachi forwards the instruments received in inward collection to the payee branch of their bank directly for ‘Acceptance’ or ‘Return unpaid’.

The payee branch settles or returns the original instrument, if any, to the designated branch in Karachi. NIFT collects all return instruments from the designated branches in Karachi, process them along with inward collection and then route them to the related designated presenting Bank branch in Karachi.

The Settlement proceeds of the instruments would be communicated to the concerned branch immediately by electronic or any other means on the same day for crediting to the concerned depositor’s account.

11.9.5. Date Stamp
The Collecting Bank will affix the stamp of the date on which outward instruments would be sent to N1FT for collection.

11.9.6. Settlement
The net settlement will take place by debiting or crediting the respective banks’ US Dollar clearing accounts on settlement date.

11.9.7. Settlement Statements
NIFT will provide a statement of collection / settlement statistics on monthly basis to ascertain the expenses payable by the lodging bank to paying bank at the rate of Rs. 100/- per instrument (for cheques drawn on cities other than Karachi) irrespective of whether the instruments are paid or return unpaid.

All other reports and information will be produced and provided on the existing pattern as for rupee clearing. NIFT will provide stationery and usual collection / settlement preparation material to the branches as is being done for PKR clearing systems.

11.9.8. Forced Retention
If for some unavoidable reasons the relevant bank is unable to provide a returned cheque on the specific collection / settlement date due to any reason beyond control, the designated bank office in Karachi will provide to the concerned bank along with inward clearing instruments, with a copy to NIFT, a document on prescribed format (agreed between the banks and NIFT) giving details of the instrument, undertaking that the said instrument will be provided to the lodging bank directly on availability but not later than the subsequent collection / settlement date, that instrument will be considered as returned unpaid.

This process may function in such a manner that the designated bank will furnish the prescribed document in duplicate to NIFT’ in place of the returned document and NIFT will send the first copy to the lodging bank along with other returns, if any, as a return instrument.

11.9.9. Settlement In Case Of Insufficient Balances
At any point in time when the net debit (inward & outward) cannot be paid out of a bank’s US Dollar clearing account (due to insufficient balance) held with SBP BSC(Bank), Karachi, the State Bank reserves the right to adopt a suitable alternate.. This will primarily take the shape of payment through an appropriate overnight SWAP from the Pak Rupees clearing account balance of the bank with SBP to the extent of such shortfall in US Dollar account. (It means that if there is a shortage of funds in the Dollar account, State Bank will debit the relevant banks Pak Rupee Account in which the Bank keeps the statutory cash reserve amount and provide Dollars in the Dollar Account to meet the requirement.)

11.9.10. Settlement Charges
NIFT will charge the presenting bank Rs.100/- per instrument for its services and Rs.100/- for processing a return instrument.

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“Whenever you find yourself on the side of the majority, it is time to pause and reflect.” -Mark Twain